The attacks by the United States and Israel on Iran have created a global energy crisis, as oil and gas exports from the Gulf are restricted and global prices rise.

This has created a significant risk for the New Zealand energy system and the broader economy, with its high dependence on expensive and unreliable fossil fuels. 

This creates first order economic consequences with higher energy prices, second order consequences with higher energy prices feeding into higher prices in other sectors, and third order challenges as the central bank looks to increase interest rates to respond to the resultant higher inflation. 

All three together constitute a significant headwind for the New Zealand economy, caused by its exposure to fossil fuels.

New Zealand was already facing energy issues, which the Government was attempting to resolve with a set of policies that involved significant fiscal and regulatory support for fossil fuels. 

This is not to say that every single Government policy was oriented to fossil fuels, nor that vulnerability to fossil fuel shocks is a new thing for New Zealand in just the last two years, but certainly the large majority of policies rolled out over the last two years could be characterised as ‘fossil-first’ (see list at the end).

That ‘fossil-first’ policy approach is very problematic from a climate perspective, as well as economically dubious, but in light of the global fossil fuel crisis it is now entirely anachronistic.

The Economic Cost of Fossil Fuel Dependency

In 2025 New Zealand spent around $7 billion importing petrol and diesel for land transport. 

With the current spike in fossil fuel prices, New Zealand may end up spending closer to $10 billion in 2026. This is close to 2.5% of GDP and adds to the trade deficit and the current account deficit.

This is $7b to $10b every year that we don’t spend locally, and that we have to generate foreign exchange earnings to purchase.

Looking beyond the high prices, we still also face a risk of restricted supplies. This would be very disruptive to the New Zealand economy.

Even if the Strait of Hormuz were to open soon, the damage and disruption to oil and gas production will mean that higher oil and gas prices are here to stay for many months at least.

But Governments are allowed to change direction – after all, as the International Energy Agency has stated, the world is in the middle of the biggest oil supply shock the world has ever seen. 

So here are some suggestions of what a rational Government would do if it wanted to abandon an ideological fossil-first policy approach and replace it with a practical energy-resilience-in-the-age-of-climate-crisis approach.

Energy Resilience and Climate Reduction Together

We need to embrace a change in energy and transport policy away from fossil fuels and towards electrification, renewables, storage and energy efficiency. A greener energy policy will be good for the climate, good for energy resilience, and good for the overall economy.

The policy direction needs to be heading towards a reduction in fossil fuel use, which has the co-benefit of reducing climate pollution. There are two timeframes to consider – short term, to cope with the current crisis, and medium to long term to decarbonise the economy and reduce the longer term impact of expensive and unreliable fossil fuels.

In the short term the aim is to decrease fossil fuel use quickly by decreasing demand in the transport sector, as recommended by the International Energy Agency in March. We recommend the Government consider the following polices:

  • Make public transport free, or at least significantly cheaper, for a period of at least three months (Victoria and Tasmania are already doing this).
  • Increase funding so that public transport can be ramped up with more services where possible in the short term.
  • Ensure that KiwiRail is making rail freight as accessible as possible.
  • Support councils to introduce ‘pop up’ bikelanes to complete sections of cycle networks immediately with temporary protected cycleways.
  • Encourage work from home where possible – start with the public sector.
  • Reduce speed limits on highways to reduce fuel consumption, and reduce urban speed limits to improve safety for cyclists.

In the medium to  longer term the nation has an abundant energy future if we choose to embrace policies including the following:

Transport

  • Change the Government Policy Statement on Land Transport to increase investment in public transport, so that more journeys are diverted away from cars.
  • Reprioritise funding to support the building of protected cycle networks and walking infrastructure.
  • Invest in rail for freight and passenger journeys.
  • Support the electrification of heavy vehicles and ‘last mile’ delivery trucks.
  • Stop the proposed spending on Roads of National Significance, whose business case needs to be reassessed in light of high fuel prices (and climate change).
  • Reintroduce stronger vehicle fuel efficiency standards to drive uptake of low emissions vehicles.
  • Reintroduce climate change as a consideration in making transport investment decisions (yes the Luxon Govt removed it!).

Households

  • Provide support to households to install batteries, hot water heat pumps, and solar panels. This could be a subsidy or a zero interest loan scheme or a low interest loan such as we suggested some years ago. Make sure feed-in tariffs support it. Hot water heat pumps and solar panels can produce/save as much power as the LNG import plant for a fraction of the cost. 
  • Mandatory energy performance certificates for residential and commercial buildings to provide information to potential renters and buyers.
  • End new fossil gas connections which lock users into expensive polluting energy.
  • Expand the Government’s Warmer Kiwi Homes programme beyond insulation into efficient home heating.
  • Ensure that new heat pumps and EV chargers are ‘demand flexible’ so they can cut demand during peak demand (with user consent). 

Renewables

  • Commit to not circumventing the fast track panel draft decision to reject seabed mining off Taranaki. This would create some policy certainty so that offshore wind generators can finalise their proposals.
  • Reinstate the renewable preference in the Government’s Energy policy.

Industry

  • Reintroduce funding such as the Government Investment in Decarbonising Industry fund to support businesses to transition off fossil fuels.
  • Promote and support the electrification of agricultural machines.
  • Fix the ETS to provide a clear price signal. In particular this means putting a price on the largest climate polluting industry – agribusiness.

End subsidies to fossil fuels

  • Reverse the decision to import LNG, a decision that is likely to cost $5.9billion to $8.3billion according to the Green Business Council (over 15 years if fully utilised). This decision sends the wrong signal to current fossil gas users while locking in expensive unreliable fossil gas.
  • Stop subsidising fossil fuel exploration (currently $200m).
  • Close the regulatory door to taxpayers covering the end-of-life clean up costs for old oil and gas fields i.e. reinstate trailing liability.

This is not an exhaustive policy list but nonetheless provides a clear direction of travel which will reduce the vulnerability of the New Zealand economy and society to volatile fossil fuel prices and supply, while simultaneously reducing damaging greenhouse gas emissions.

Two Years of ‘Fossil First’ Govt Policy 

By way of background it is worth noting that unfortunately many of the policies pursued by the Government over the last two years have increased the risk to New Zealand by increasing dependency on fossil fuel use. The current Government has:

  • Removed the Clean Car Discount, which supported sales of EVs and low emissions vehicles and disincentivized sales of high fuel consumption vehicles. This removal resulted in a collapse of EV sales.
  • Weakened the Clean Car Standard, which incentivized importers to sell more fuel efficient vehicles and penalised them for selling more high fuel consumption vehicles. This weakening led to an increase in sales of heavy fuel inefficient vehicles;
  • Abolished the Government Investment in Decarbonising Industry (GIDI) fund which helped businesses move off fossil fuels. The GIDI had enabled many businesses to cut fossil fuel use and its abolition left many businesses stranded on fossil fuels without the capital to transition;
  • Scrapped the Climate Emergency Response Fund which had been used to fund transport projects such as public transport, walking and cycling;
  • Reduced support for public transport, leading to higher fares and fewer services;
  • Blocked funding to new cycling or walking infrastructure. This led to the stalling of cycling infrastructure projects and hence more car use;
  • Banned Councils from using transport funding to improve cycleways or pedestrian walkways during local road maintenance projects;
  • Increased speed limits on roads, which not only increased fuel consumption, it made cycling more dangerous and hence discouraged cycling;
  • Collapsed prices in the Emission Trading Scheme, through various policies, which reduced incentives to use less fossil fuels in transport and other sectors;
  • Failed to deliver on an EV charging network as promised;
  • Blocked the development of offshore wind generation Taranaki through its overt support for seabed mining in the same location, which is incompatible with offshore wind. This resulted in two offshore wind consortia leaving the country; 
  • Cancelled the NZ Battery Project which was looking into options to underpin the electricity system with long term large scale storage;
  • Cancelled the Gas Transition Plan, which was looking to reduce our use of fossil gas;
  • Proposed diverting tens of billions of Government funding into Roads of National Significance which takes funding away from projects that reduce fossil fuel dependency; and
  • Proposed building an LNG import facility, which reduces the incentives to move off fossil gas.

Fast tracking renewable energy

It has been stated by the Government that it has been fast tracking renewable energy projects via the Fast Track Approvals Act process, a process which sidesteps environmental guardrails. It is true that eight projects have been approved under this process, though they most probably would have been approved under the normal process, though perhaps modified to reflect environmental concerns. 

But the previous Covid fast track process, which unlike the Fast Track Approvals Act retained environmental guardrails, approved around 14 renewable energy generation projects. 

But the most important point to make is that the normal RMA process resulted in approval for more than 45 renewable energy projects with a capacity of 4300MW. These projects are the largest part of the pipeline of the new generation.